How the deduction works
Under the Construction Industry Scheme, a contractor paying a subcontractor deducts tax at source and passes it to HMRC. The rate depends on your status:
- 20% - registered for CIS and verified by the contractor
- 30% - not registered, or the contractor could not verify you
- 0% - you hold gross payment status
The deduction comes off labour only, never materials. On a £2,000 job that is £1,200 labour and £800 materials, the deduction is £240 and you should be paid £1,760. If you are on 30%, registering for CIS is usually the single quickest pay rise available to you.
Split labour and materials on every invoice
If your invoice does not show the split, the contractor has little choice but to deduct on the whole amount - and that £800 of materials just cost you an extra £160 in cash flow until year end. Itemise labour and materials as separate lines every time, with the materials at what they actually cost you. It is your job to show the split, not the contractor's to guess it.
Keep every payment and deduction statement
For any tax month a contractor deducts from you (tax months run from the 6th to the 5th), they must give you a payment and deduction statement within 14 days of the month end - so by the 19th. Those statements are your proof of what has already been paid to HMRC on your behalf.
Chase a missing statement in the same month, while the contractor's paperwork is fresh. A shoebox of them in April is hard to reconcile; a running record is not.
The deductions are your money on account
A CIS deduction is not money lost - it is income tax paid in advance. When your year-end position is worked out, everything deducted through the year is credited against your income tax and Class 4 National Insurance bill. Because deductions are taken from labour with no allowance for your expenses or personal allowance, many subcontractors have overpaid by year end and are due a refund.
That refund only arrives if the deductions are all on record. Track the running total through the year, matched against your statements, and you know what is coming back before HMRC does.
Gross payment status
With gross payment status, contractors pay you in full and you settle your tax at year end like any other sole trader. To qualify you need a clean compliance record, a business bank account, and labour turnover (excluding materials) of at least £30,000 as a sole trader. HMRC reviews it each year and can remove it for late filing, so it rewards tidy paperwork. If cash flow is tight, it is worth the application.
If you pay subbies yourself
The moment you pay a subcontractor, you have contractor duties on top:
- Verify each subcontractor with HMRC before first payment - verification sets the rate you must deduct
- File a CIS return every month by the 19th - and from April 2026 nil returns are mandatory too, with an automatic £100 penalty for a missed one
- Give each subbie a statement for every month you deduct
- Keep a due diligence trail - under the 2026 rules HMRC can hold you liable at the 30% rate if a subcontractor you paid turns out not to be who they claimed